Page 339 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 6. Employee Benefits and Perquisites 325

Another investment alternative to stocks are bonds. When purchasing bonds, it may be
smart to buy them with different maturity dates. This approach, called “laddering,” should
minimize the impact of not catching a high interest rate. By smoothing out the investment
period, one is dollar averaging the interest rates. As a result, one will not catch the high rate
but also will not be stuck with a portfolio of low rates at a time of rising interest rates.
When considering investing in bonds, it is appropriate to consider more than rising or
falling interest rates. There are a number of risks to consider: credit rating (a lower rating of
the bond issue will most likely result in a lowering of its price); default (the issuer cannot
make interest payments or pay principal); liquidity (issuer or market factor that makes bond
easy or difficult to sell); and market (value will rise or fall with interest rates in general).
As can be seen, deciding how to invest one’s money can be rather complicated.
Employees logically look to the company for help in deciding where to put their money.
Unfortunately, companies avoid giving advice because while not legally obligated to do so,
they can be held accountable if they do give advice and the result is not what was predict-
ed. To fill this advice void, some companies provide broad-based financial counseling with
an outside vendor, whereas (as described earlier) executives look to financial planners for
customized advice.
Investment advisors often suggest not more than 10 percent of the portfolio be in the
company’s stock. This certainly is a prudent approach to a balanced portfolio; however, the
individual may regret this conservative philosophy if the company stock significantly out-
performs other investment alternatives. Conversely, poor company performance will not only
affect one’s stock portfolio, but also the poor performance may lead to cutbacks and the
possible loss of one’s job—a disastrous double whammy.
Plans that are very difficult to get money out of probably have lower levels of participa-
tion than plans with liberal withdrawal provisions. For some, withdrawal privileges may be as
important as a higher percentage company match.
Typically, the employee has several options in taking money out. The individual who is
still an employee usually can make either a partial or a full early withdrawal. As the terms
imply, the difference lies in whether all or only a portion of the money is removed. The other
withdrawal is the normal withdrawal that occurs when the person leaves the company,
although some plans permit the individual to keep the funds in the plan until a designated date.
Alternatively, the individual could roll the money over to an IRA or the defined-benefit plan
of a new employer, being careful not to mingle pretax with after-tax dollars.
Depending on the objective of the plan, early withdrawals are either reasonably easy to
accomplish (within the requirements prescribed by the IRC and interpreted by the IRS to
avoid constructive receipt of employer contributions) or more difficult (consistent with a plan
intended to be a supplement to the defined-benefit pension plan). Plan penalties set the
period of suspension from the plan, the frequency at which withdrawals may be made, and in
the case of partial withdrawals, the amount withdrawn. The rules may be different for partial
versus full withdrawals. Withdrawals made before age 59 1/2 (except those meeting statutory
exceptions) are subject to a tax of 50 percent in addition to any income tax due. Penalties of
50 percent may be imposed on the minimum withdrawal amount if that amount has not been
taken out at age 70 1/2. The minimum, amount is recalculated each year in accordance with
Table 6-33. The number shown is the denominator; the plan balance is the numerator.
However, many plans make an exception for hardship withdrawals (i.e., amounts needed
to meet a financial crisis). Typically, this might include college expenses for children, purchase